83 FR 31042 - Government National Mortgage Association: Loan Seasoning for Ginnie Mae Mortgage-Backed Securities-Interpretive Rule

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Federal Register Volume 83, Issue 128 (July 3, 2018)

HUD is issuing this interpretive rule to clarify the scope of the provision of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act (Act) that prohibits the Government National Mortgage Association (Ginnie Mae) from guaranteeing the timely payment of principal and interest on a security that is ``backed by a mortgage'' that fails to meet certain ``seasoning'' requirements. With this new amendment, questions have arisen as to the effect of this provision on Ginnie Mae's ability to guarantee Multiclass Securities where the trust assets consist of direct or indirect interests in certificates, previously lawfully guaranteed by Ginnie Mae, but with underlying mortgage loans that may not be in compliance with the seasoning requirements. This rule provides HUD's interpretation that the statutory provision does not prohibit Ginnie Mae from making guarantees in this context. Although interpretive rules are exempt from public comment under the Administrative Procedure Act, HUD nevertheless invites public comment on the interpretation provided in this rule.

[Federal Register Volume 83, Number 128 (Tuesday, July 3, 2018)]
[Rules and Regulations]
[Pages 31042-31045]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-14354]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 330

[Docket No. FR-6112-IA-01]


Government National Mortgage Association: Loan Seasoning for 
Ginnie Mae Mortgage-Backed Securities--Interpretive Rule

AGENCY: Office of General Counsel, HUD.

ACTION: Interpretive rule.

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SUMMARY: HUD is issuing this interpretive rule to clarify the scope of 
the provision of the recently enacted Economic Growth, Regulatory 
Relief, and Consumer Protection Act (Act) that prohibits the Government 
National Mortgage Association (Ginnie Mae) from guaranteeing the timely 
payment of principal and interest on a security that is ``backed by a 
mortgage'' that fails to meet certain ``seasoning'' requirements. With 
this new amendment, questions have arisen as to the effect of this 
provision on Ginnie Mae's ability to guarantee Multiclass Securities 
where the trust assets consist of direct or indirect interests in 
certificates, previously lawfully guaranteed by Ginnie Mae, but with 
underlying mortgage loans that may not be in compliance with the 
seasoning requirements. This rule provides HUD's interpretation that 
the statutory provision does not prohibit Ginnie Mae from making 
guarantees in this context. Although interpretive rules are exempt from 
public comment under the Administrative Procedure Act, HUD nevertheless 
invites public comment on the interpretation provided in this rule.

DATES: 
    Effective date: This interpretive rule is effective June 29, 2018, 
and is applicable beginning June 25, 2018.
    Comment due date: August 2, 2018.

ADDRESSES: Interested persons are invited to submit comments regarding 
this interpretive rule to the Regulations Division, Office of General 
Counsel, Department of Housing and Urban Development, 451 7th Street 
SW, Room 10276, Washington, DC 20410-0500. Communications must refer to 
the above docket number and title. There are two methods for submitting 
public comments. All submissions must refer to the above docket number 
and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 7th Street SW, Room 10276, 
Washington, DC 20410-0500. Due to security measures at all Federal 
agencies, however, submission of comments by mail often results in 
delayed delivery. To ensure timely receipt of comments, HUD recommends 
that comments submitted by mail be submitted at least two weeks in 
advance of the public comment deadline.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
www.regulations.gov. HUD strongly encourages commenters to submit 
comments electronically. Electronic submission of comments allows the 
commenter maximum time to prepare and submit a comment, ensures timely 
receipt by HUD, and enables HUD to make them immediately available to 
the public. Comments submitted electronically through the 
www.regulations.gov website can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.
    Note: To receive consideration as public comments, comments must be 
submitted through one of the two methods specified above. Again, all 
submissions must refer to the docket number and title of the rule.
    No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
    Public Inspection of Public Comments. All properly submitted

[[Page 31043]]

comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, an appointment to review the public comments must be 
scheduled in advance by calling the Regulations Division at 202-708-
3055 (this is not a toll-free number). Individuals with speech or 
hearing impairments may access this number via TTY by calling the 
Federal Relay Service at 800-877-8339. Copies of all comments submitted 
are available for inspection and downloading at www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Kevin M. Simpson, Associate General 
Counsel for Finance and Administrative Law, Office of General Counsel, 
Department of Housing and Urban Development, 451 7th Street SW, Room 
8150, Washington, DC 20410; telephone number 202-402-2036. Persons with 
hearing or speech impairments may access this number via TTY by calling 
the toll-free Federal Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

    Established by the Federal National Mortgage Association Charter 
Act (Ginnie Mae Charter),\1\ Ginnie Mae guarantees investors the timely 
payment of principal and interest on single class mortgage-backed 
securities (MBS) issued by private lenders and others that are backed 
by pools of mortgage loans insured or guaranteed by the U.S. Department 
of Housing and Urban Development, Federal Housing Administration (FHA), 
U.S Department of Veterans Affairs (VA), U.S. Department of 
Agriculture, Rural Development (RD), and U.S. Department of Housing and 
Urban Development, Office of Public and Indian Housing (PIH). The 
Ginnie Mae guaranty, backed by the full faith and credit of the United 
States Government, which Ginnie Mae places on MBS lowers the cost of, 
and maintains the supply of, mortgage financing for such government-
backed loans. The authority for these guaranties is found in section 
306(g)(1) of the Ginnie Mae Charter.\2\ As stated in Ginnie Mae's All 
Participants Memorandum 18-04, any Ginnie Mae MBS with an issuance date 
of May 2018 or earlier is not affected by the Act. Further, any 
refinanced VA mortgage loan that does not meet the seasoning 
requirement contained in the Act, that was not backing a Ginnie Mae MBS 
prior to May 24, 2018, is ineligible to serve as MBS collateral.
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    \1\ 12 U.S.C. 1716 et seq.
    \2\ 12 U.S.C. 1721(g)(1).
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    The ``Multiclass Securities Program'' is a vehicle that further 
increases the liquidity of Ginnie Mae MBS and attracts new sources of 
capital for federally insured or guaranteed loans. Ginnie Mae 
Multiclass Securities are collateralized by trust assets that consist 
of direct or indirect interest in certificates with underlying FHA, VA, 
RD, and PIH mortgage loans (i.e., MBS or previously issued Multiclass 
Securities). Ginnie Mae Multiclass Securities direct principal and 
interest payments from the underlying MBS or previously-issued 
Multiclass Securities to classes (known as tranches) with different 
principal balances, interest rates, average lives, prepayment 
characteristics, and final maturities. This enables investors with 
different investment horizons, risk-reward preferences, and asset-
liability management requirements to purchase mortgage securities that 
are tailored to their needs. The authority for this program is also 
found in section 306(g)(1) of the Ginnie Mae Charter.
    On May 24, 2018, President Trump signed into law the Act.\3\ Title 
III of the Act contains several legislative protections for veterans, 
consumers and homeowners, including section 309, which largely 
incorporated the ``Protecting Veterans from Predatory Lending Act of 
2018.'' Section 309(b) of the Act amended section 306(g)(1) of the 
Ginnie Mae Charter \4\ to add the following sentence: ``The Association 
may not guarantee the timely payment of principal and interest on a 
security that is backed by a mortgage insured or guaranteed under 
chapter 37 of title 38, United States Code,\5\ and that was refinanced 
until the later of the date that is 210 days after the date on which 
the first monthly payment is made on the mortgage being refinanced and 
the date on which 6 full monthly payments have been made on the 
mortgage being refinanced.''
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    \3\ Public Law 115-174.
    \4\ 12 U.S.C. 1721(g)(1).
    \5\ 38 U.S.C. chapter 37 governs VA loans.
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    This seasoning requirement was designed to deter lenders from 
encouraging veterans to refinance their VA mortgage loans often and 
repeatedly. This practice of ``churning'' led to faster prepayment 
speeds on the mortgages underlying Ginnie Mae MBS and Multiclass 
Securities, making these securities less valuable to investors. 
Increased prepayment speeds means that the underlying loans, and 
therefore a portion of the related securities, do not stay outstanding, 
at the agreed upon interest rates, as long as expected. This 
uncertainty adversely affects the investor expectations, resulting in 
low prices on the securities and therefore higher coupon rates for MBS 
and Multiclass Securities. The value to investors of the predictability 
of Ginnie Mae MBS and Multiclass Securities as opposed to alternatives 
is one reason, however, that interest rates on mortgage loans insured 
or guaranteed by VA, FHA, RD and PIH are kept at relatively low 
interest rates. Accordingly, ``churning'' was seen as detrimental to 
veterans not only because those who refinanced often did not realize 
that the overall refinance costs could outweigh the short-term 
benefits, but also because overall mortgage rates were higher than they 
would otherwise be in part because of the adverse impact, in the view 
of the investors, of higher prepayment speeds on the VA mortgage loans 
backing the Ginnie Mae MBS and Multiclass Securities.

II. This Interpretive Rule

    It is HUD's interpretation that as of the enactment of the Act, any 
VA refinanced mortgage loan that does not meet the seasoning 
requirements contained in section 309(b) of the Act is ineligible to 
serve as collateral for Ginnie Mae MBS. Ginnie Mae MBS guaranteed 
before the enactment of the Act, that contain VA refinanced mortgage 
loans that do not meet the seasoning requirements contained in the Act, 
are unaffected by the Act. For Multiclass Securities, the Act does not 
prohibit Ginnie Mae from guaranteeing Multiclass Securities where the 
trust assets consist of direct or indirect interests in Ginnie Mae 
guaranteed certificates with underlying VA mortgage loans that may not 
comply with the statutory seasoning requirement. As discussed more 
fully below, this reading of section 309(b) is supported by a close 
reading of the relevant statutory language. Further, and as discussed 
below, a contrary interpretation of section 309(b) of the Act would 
defeat the provision's purposes of restricting VA loan churning and 
protecting veterans.

A. Statutory Text

    HUD's interpretation is supported by a close reading of the 
statutory text of the Ginnie Mae Charter, section 309(b) of the Act, 
and section 309 more broadly.
    The language of section 309(b) of the Act differs in significant 
respect from the long-standing language in the Ginnie Mae Charter. 
Section 306(g)(1) of the Ginnie Mae Charter refers to the securities 
that Ginnie Mae is authorized

[[Page 31044]]

to guarantee as those ``backed by a trust or pool composed of 
mortgages,'' language that has long been understood by Congress and HUD 
to encompass both MBS and Multiclass Securities. See Letter from Nelson 
Diaz to Dwight P. Robinson (June 27, 1994). However, the language added 
by section 309(b) of the Act does not use similarly broad language--it 
refers only to those securities that are ``backed by a mortgage.'' It 
is a well-settled principle of statutory interpretation that ``the use 
of different words within the same statutory context strongly suggests 
that different meanings were intended.'' \6\ In addition, ``a statute 
should be constructed so that effect is given to all of its provisions, 
so that no part will be inoperative or superfluous, void or 
insignificant.'' \7\ Under these principles, Congress's decision to use 
only the words ``backed by a mortgage,'' as compared to ``backed by a 
trust or pool composed of mortgages,'' should be given meaning.
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    \6\ United States v. Maria, 186 F.3d 65, 71 (2d Cir. 1999) 
(citing Crockett Telephone Co. v. F.C.C., 963 F.2d 1564, 1570 (D.C. 
Cir. 1992) and other cases); see also A. Scalia & B. Garner, Reading 
Law: The Interpretation of Legal Texts 170 (2012) (``[W]here the 
document has used one term in one place, and a materially different 
term in another, the presumption is that the different term denotes 
a different idea.'').
    \7\ Marx v. General Revenue Corp., 568 U.S. 371, 392-93 (2013).
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    To give meaning to the narrower language in section 309(b) of the 
Act, that provision should be read to reference a narrower class of 
securities (MBS) than all of the securities long understood to be 
covered by the broader language of section 306(g) the of Ginnie Mae 
Charter (both MBS and Multiclass Securities). Had Congress intended 
section 309(b) of the Act to encompass Multiclass Securities as well as 
MBS, it would have employed the broader language known to encompass 
both types of securities--i.e., ``backed by a trust or pool composed of 
mortgages.'' Instead, Congress used only the words ``backed by a 
mortgage.'' HUD believes that the best way to give that distinction 
meaning, as required under the case law, is to read the narrower phrase 
to encompass only those securities that are backed directly by 
mortgages (i.e., MBS) as opposed to securities that are backed directly 
by a trust of securities that are ultimately backed by mortgages (i.e., 
Multiclass Securities).
    This reading is supported by nearby statutory language in section 
306(g)(3) of the Ginnie Mae Charter. As the Supreme Court has 
explained, ``[t]he plainness or ambiguity of statutory language is 
determined by reference to the language itself, the specific context in 
which that language is used, and the broader context of the statute as 
a whole.'' \8\ The language of section 306(g)(3) of the Ginnie Mae 
Charter refers differently to MBS and to Multiclass Securities in a way 
that supports reading section 309(b) of the Act to apply only to MBS. 
In sections 306(g)(3)(A) and (B) of the Ginnie Mae Charter, Congress 
describes MBS as ``securities or notes based on or backed by 
mortgages.'' In contrast, in section 306(g)(3)(E) of the Ginnie Mae 
Charter, Congress refers distinctly to Multiclass Securities as being 
``backed by a trust or pool of securities or notes guaranteed by 
[Ginnie Mae].'' Put more simply, section 306(g)(3) of the Ginnie Mae 
Charter describes MBS as securities backed by mortgages and describes 
Multiclass Securities differently as securities backed by a trust or 
pool of securities or notes, even though Multiclass Securities 
ultimately also are backed by mortgages. The narrow language of section 
309(b) of the Act --``a security backed by a mortgage''--appears 
intended to track the description of MBS in section 306(g)(3)(A) and 
(B) of the Ginnie Mae Charter and not to include Multiclass Securities 
as described in section 306(g)(3)(E) of the Ginnie Mae Charter.
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    \8\ Robinson v. Shell Oil Co., 519 U.S. 337, 341, 117 S. Ct. 
843, 846 (1997).
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    In addition, this interpretation of section 309(b) of the Act is 
supported by a holistic reading of section 309. Other provisions in 
this section refer explicitly to MBS, but none refers to Multiclass 
Securities. In section 309(c) of the Act, for example, the statute 
imposes reporting requirements on Ginnie Mae to allow it to monitor the 
effectiveness of the Act in regards to MBS, but the provision does not 
reference Multiclass Securities. This strongly implies that MBS were 
the only securities targeted by Congress in section 309 of the Act, and 
that section 309(b) of the Act therefore does not apply to Multiclass 
Securities.
    Lastly, this reading is supported by the heading of section 309(b) 
of the Act--``Loan Seasoning for Ginnie Mae Mortgage-Backed 
Securities.'' The heading refers only to MBS and makes no reference to 
Multiclass Securities. The Supreme Court has said that ``the title of a 
statute or section can aid in resolving ambiguity in the legislation's 
text.'' \9\ Thus, to the extent section 309(b) of the Act is ambiguous, 
its heading clarifies its limited application to MBS only.
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    \9\ INS v. National Center for Immigrants Rights Inc, 502 U.S. 
183 (1991).
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B. Inconsistency With Purpose of Statute

    HUD's interpretation of section 309(b) of the Act is also 
consistent with the purposes of both section 309 of the Act and the 
Ginnie Mae Charter. A contrary reading would prohibit Ginnie Mae from 
guaranteeing all new Multiclass Securities ultimately backed by any 
prohibited mortgage, including Multiclass Securities composed solely of 
securities lawfully guaranteed prior to enactment of the Act. 
Prohibiting Ginnie Mae from guaranteeing such securities would harm, 
not help, veterans and would therefore contravene the purposes of 
section 309 of the Act and the Ginnie Mae Charter.
    1. Anti-Churning. As noted, section 309 of the Act was intended to 
protect both veterans and investors by discouraging the unfair lending 
practice of ``churning.'' By prohibiting Ginnie Mae from guaranteeing 
MBS containing any loans refinanced in violation of the seasoning 
requirements, the Act decreases the marketability of these loans and 
thereby motivates lenders to avoid such practices in the future. By 
contrast, prohibiting Ginnie Mae's ability to guarantee Multiclass 
Securities containing MBS that were guaranteed by Ginnie Mae prior to 
the Act becoming law can have no impact on lender behavior. The lender 
cannot change the circumstances surrounding the production of a loan 
securitized and sold prior to the enactment of the Act. Further, it may 
be unknowable whether the previously guaranteed MBS or previously 
issued Multiclass Security would comply with section 309(b) of the Act 
because assuring and tracking compliance with the seasoning 
requirements in the Act were not requirements for Ginnie Mae securities 
prior to the Act's enactment. To interpret the prohibition of section 
309(b) of the Act to include Multiclass Securities, therefore, is to 
sanction a measure that does not advance the legislative aim of 
decreasing the financial motives of lenders to engage in the predatory 
practices at issue.
    2. Protection of Veterans. Interpreting section 309(b) of the Act 
to prohibit the guarantee of Multiclass Securities composed of trust 
assets that consist of direct or indirect interests in certificates 
with underlying VA mortgage loans that were guaranteed prior to the 
enactment of the statute would also have a negative impact on the 
liquidity of the Multiclass Securities market, driving up VA mortgage 
rates and restricting the availability of the VA mortgage loans to the 
very veterans that the statute was intended to protect.

[[Page 31045]]

    The Act enacted several legislative changes, including section 309, 
that were aimed at protecting veterans from predatory lending practices 
in connection with refinancing activity and preserving the relatively 
low rates created by Ginnie Mae guarantees without the adverse impact 
of high prepayment speeds.\10\ The broader purpose of these provisions 
is to benefit veterans by providing them with affordable housing. 
Indeed, section 309(b) of the Act is titled ``Protecting Veterans from 
Predatory Lending.'' This is also one of the purposes of the Ginnie Mae 
Charter, which was amended by section 309(b) of the Act.
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    \10\ See e.g., section 302 (limits, and establishes a dispute 
process and verification procedures with respect to, the inclusion 
of a veteran's medical debt in a consumer credit report); section 
313 (makes permanent the one-year grace period during which a 
servicemember is protected from foreclosure after leaving military 
service)).
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    Under settled precedent, Section 309(b) of the Act cannot be 
construed in a way that would frustrate the purposes of either Section 
309 of the Act or the Ginnie Mae Charter. The Supreme Court has 
instructed that courts ``cannot interpret federal statutes to negate 
their own stated purposes.'' \11\ Moreover, a statutory provision that 
may seem ``ambiguous in isolation is often clarified by the remainder 
of the statutory scheme . . . because only one of the permissible 
meanings produces a substantive effect that is compatible with the rest 
of the law.'' \12\
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    \11\ New York State Dept. of Social Servs. v. Dublino, 413 U.S. 
405, 419-420 (1973).
    \12\ United Sav. Assn. of Tex. v. Timbers of Inwood Forest 
Associates, Ltd., 484 U.S. 365, 371 (1988).
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    But to conclude that section 309(b) of the Act precludes the 
guarantee of Multiclass Securities collateralized by MBS and Multiclass 
Securities previously and lawfully issued by Ginnie Mae also would 
frustrate the purpose of these statutes. Precluding existing MBS and 
Multiclass Securities--where it is now difficult, if not practically 
impossible, to assess compliance with Section 309(b) of the Act would 
potentially ``orphan'' billions of dollars worth of outstanding Ginnie 
Mae securities that were validly guaranteed under prior law. This is 
because they never could be incorporated into Multiclass Securities 
after the enactment of the Act. This would frustrate the reasonable 
expectations of Ginnie Mae investors who purchased Ginnie Mae MBS at 
prices that explicitly contemplated their ultimate inclusion in 
Multiclass Securities. Because these securities would then decrease in 
value, the end result would be increased interest rates for veterans. 
Given that this would harm, rather than help, veterans, it is difficult 
to imagine that Congress intended to cause significant disruption to 
the Multiclass Securities program beyond what was needed to stop the 
undesirable lending practices on a prospective basis. Further, 
restricting the inclusion of existing MBS and previously issued 
Multiclass Securities as eligible collateral would not decrease the 
amount of risk to Ginnie Mae and the investors since the certificates 
are already guaranteed.

III. Conclusion

    For the reasons described above, it is HUD's interpretation that as 
of the enactment of the Act, any VA refinanced mortgage loan that does 
not meet the seasoning requirements contained in section 309(b) the Act 
is ineligible to serve as collateral for Ginnie Mae MBS. Ginnie Mae MBS 
guaranteed before the enactment of the Act, that contain VA refinanced 
mortgage loans that do not meet the seasoning requirements contained in 
the Act, are unaffected by the Act. For Multiclass Securities, the Act 
permits Ginnie Mae to guarantee Multiclass Securities even where the 
trust assets consist of direct or indirect interest in certificates 
guaranteed by Ginnie Mae without regard to whether the underlying VA 
mortgage loans are in compliance with the seasoning requirements in 
section 309(b) of the Act.

IV. Solicitation of Comment

    This interpretive rule represents HUD's interpretation of section 
309(b) of the Act and, as such, is exempt from the notice and comment 
requirements of the Administrative Procedure Act.\13\ Nevertheless, HUD 
is interested in receiving feedback from the public on this 
interpretation, specifically with respect to clarity and scope.
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    \13\ See, 5 U.S.C. 553(b)(3)(A).

    Dated: June 25, 2018.
J. Paul Compton, Jr.,
General Counsel.
[FR Doc. 2018-14354 Filed 6-29-18; 11:15 am]
BILLING CODE 4210-67-P